January 2011

January 31, 2011

Teal Group aerospace analyst Richard Aboulafia, a smart and perceptive guy prone to irreverent humor, combines all of those attributes in a witty take today on the Marine Corps modern penchant for gee whitz and exorbitantly costly weapons.

SecDef Robert Gates’ cancellation this month of the USMC’s Expeditionary Fighting Vehicle (EFV)is the latest DoD move against an “exquisite” weapon. The new definition of exquisite: an expensiveway to meet the overly-exacting requirements of a relatively small user group. “Exquisite” is thenew “gold plated.” I don’t cover land vehicles, but I haven’t met many experts who defend the EFVagainst charges of exquisiteness. But other USMC programs might be vulnerable to the new exquisite aspersion, too. In fact, a USMC aero systems bubble might lurk in Teal Group’s market forecasts

Aboulafia's bottom line is with the Pentagon's growing budget squeeze, some Marine aviation programs near and dear to the heart of Fort Worth, Texas could yet find themselves the target of budget scrooges far more concerned with current and future price tags rather than mesmerized by claims of exquisite combat capability.

The Marines still have grand plans, especially for these budget-constrained times. F-35B procurementwill cost at least $60 billion. MV-22 procurement will come to around $40 billion. Both are very expensiveto operate, too. The UH-1Y/AH-1Z program comes to $12 billion. The CH-53K, a suddennew priority, will cost around $26 billion. The Marines, in short, still plan to procure the kind of baroqueaeronauticalmenagerie that the USAF and bluewater USN were forced to abandon years ago(see my October 2010 letter for more on this).

Each V-22 pays for one larger CH-53 and one smaller H-60, a considerable gain in lift.

TealGroup’s USMC aero forecasts remain intact, for now. The USMC still has a lot of political clout.But if this is a bubble, the most vulnerable company is Bell Helicopter Textron. Their half of theV-22, and all of the AH-1Z/UH-1Y, constitute 60% of company aircraft revenue in our ten year forecast.

The current Aboulafia missive is not yet on his website so we'll attach it here for your reading pleasure.

There is a little football game going on here in North Texas this week.

It's the first time that the Metroplex has hosted the Super Bowl and everyone is gearing up for the Packers-Steelers game, including the Star-Telegram.

What that means for Sky Talk readers is that I will be away from the blog for a while as I've been temporarily assigned to our Super Bowl coverage team.

As always, my colleague, Bob Cox, will continue to post aerospace and defense news to Sky Talk, in my absence. If there is any aviation-related news you want the Star-Telegram to know about, please contact Business Editor Jim Fuquay at jfuquay@star-telegram.com.

January 29, 2011

In 40-plus years working for the Air Force and Department of Defense, Tom Christie saw his share of badly run, late and over budget defense programs.

Christie, in a story in Sunday's Fort Worth Star-Telegram, says the F-35 Joint Strike Fighter was fated for trouble from the time senior DoD officials decided in the mid-1990s they could design one airplane to meet the wishes, desires and needs of the Air Force, Navy and Marines.

"What's happened here is what happens with 90 percent of defense programs," said Christie, retired Pentagon director of operational testing and a battle-scarred veteran of 40-plus years of internal Defense Department weapons-buying conflicts.

So once again, as DoD prepares its proposed 2012 defense budget, it is being forced to devote billions more dollars to trying to fix the F-35 program.

In a conference call with analysts last week Stevens gingerly tiptoed around questions about the company's relationship with DoD these days.

Asked if the criticism of the F-35 was "a sore spot" between Lockheed and the Pentagon, Stevens said he was "very gratified for the level of cooperation" between Pentagon officials and his company. "There are not really contentious discussions," Stevens said. "There are full-throated discussions."

January 28, 2011

The F-35 Joint Strike Fighter program took another step forward Thursday with the first flight of the fifth F-35B STOVL flight test jet at Naval Air Station Fort Worth Joint Reserve Base. The short takeoff/vertical landing jet will ferry to Naval Air Station Patuxent River later, where it will join four other F-35Bs and one F-35C carrier variant aircraft currently undergoing testing.

Only two of the 13 original development flight test aircraft have yet to make their first flight, both carrier-based versions. Four conventional-takeoff-and-landing aircraft have now flown and are at Edwards Air Force Base. The original test aircraft, AA-1, which was the only one of its kind, was retired after about 100 flights and is now used for live fire testing.

Airlines ended last year in the black, but Wall Street is worried that the red ink will return in 2011.

Plans to add more capacity despite the rising cost of jet fuel, pushed several airline stocks down following their earnings announcements.

"We perceive a widespread sense of concern among investors, many of whom feel history is beginning to repeat itself with airlines reverting back to price-destructive growth mode," wrote Stifel Nicolaus analyst Hunter Keay in a research note. Many airlines told analysts on earnings calls that they were not pulling back on decisions to add more international routes in 2011.

And while profits at most carriers were boosted by bag fees and higher fares, American Airlines’ parent company, AMR, continued to post losses. AMR had a $97 million loss for the quarter and was the only major domestic carrier to report a loss for 2010, losing $471 million.

"Despite a stronger longer term unit revenue outlook, AMR’s return to profitability remains elusive," wrote Michael Derchin, an analyst at CRT Capital Group, noting that American is planning to add 4.3 percent more capacity to its network this year.

United Airlines, which recently completed its merger with Continental Airlines, posted the largest profit of 2010 with $854 million in net income. Analysts are optimistic that the largest carrier in the world will continue to report profits as United maintains its capacity discipline. United plans to add one to two percent capacity to its route network this year.

Airline

Q4 income

Q4 revenues

Alaska Airlines

$64.8 million

$958.5 million

AirTran Airways

$1.9 million

$645.5 million

American Airlines

-$97 million

$5.6 billion

Delta Airlines

$19 million

$7.8 billion

JetBlue Airways

$9 million

$940 million

Southwest Airlines

$131 million

$3.1 billion

United Airlines*

-$325 million

$8.4 billion

US Airways

$28 million

$2.9 billion

Airline

2010 income

2010 revenues

Alaska Airlines

$251.1 million

$3.8 billion

AirTran Airways

$38.5 million

$2.6 billion

American Airlines

-$471 million

$22.2 billion

Delta Airlines

$593 million

$31.8 billion

JetBlue Airways

$97 million

$3.8 billion

Southwest Airlines

$459 million

$12.1 billion

United Airlines*

$854 million

$34.0 billion

US Airways

$502 million

$11.9 billion

*includes pro forma results for a combined United Airlines and Continental Airlines even though the merger was not completed until October 1.

A source familiar with the issue said that the Air Force believes a study performed by the Navy one year ago looks increasingly accurate, based on preliminary data the service has compiled. Buzz readers will remember that the Navy study found the F-35 would cost between 30 percent and 40 percent more per plane than does the current F/A-18 fleet.

Since one of the primary goals of the F-35 program, with its web of international partners, was to lower maintenance costs by achieving economies of scale through large program buys by a significant number of countries this would call into question one of the fundamental goals of the program. Another key to achieving those savings was an international PBL contract (Performance Based Logistics). It would spread work share throughout the JSF allies and guarantee greater economies of scale than the U.S. could achieve on its own.

Lockheed Martin said its fourth-quarter operating profit shrank and predicted a smaller 2011 profit with the defense contractor contending with a more frugal Pentagon.

Revenue for the quarter rose to $12.79 billion, but profit margins were tighter. The Fort Worth-based aeronautics division saw profits fall almost 4 percent to $410 million as it sold fewer F-22 and F-16 fighters, even as the volume of work and revenues increased for the new F-35, which has slimmer profit margins.

Aeronautics delivered only 20 F-16 fighters in 2010, down from 31 a year earlier.

Selling the Enterprise Integration Group business brought in a $184 million gain, or 51 cents per share, for the quarter, and pushed Lockheed's net income to $983 million, up almost 19 percent from a year earlier. It earned $829 milion, or $2.30 per share, from continuing operations. Analysts surveyed by FactSet were expecting a profit of $2.17 per share.

"I believe it was very solid performance in a very demanding year," said Lockheed Chief Executive Bob Stevens. "Looking ahead, our employees are focused on providing increasingly affordable solutions to our customers and continuing strong financial results for our shareholders.”

Lockheed says it expects to sell its Pacific Architects and Engineers business during the first quarter of this year.

The company had several bright spots. The Grand Prairie-based Missiles and Fire Control division posted a $50 million increase in operating profit in the quarter and $73 million for the full year.

Chief Financial Officer Bruce Tanner said in an interview that Lockheed Martin’s backlog grew to more than $78 billion by the end of the year. The U.S. needs "to provide global security in a very fiscally challenged environment," he said, adding "I think we have products that align with that very nicely."

For the full year, Lockheed earned $2.93 billion, or $7.94 per share. Revenue rose 4.1 percent to $45.8 billion. It had earned $3 billion in 2009.

The Bethesda, Md., company said its 2011 profit should be $6.70 to $7 per share, down from $7.94. It said revenue should be between $45.75 billion and $47.25 billion.

Aviation Week reporters have dug a little deeper into the litany of existing problems with the F-35B, as detailed earlier this week by the Department of Defense's F-35 Joint Program Office. The numerous problems are a key reason Defense Secretary Robert Gates has put the F-35B on the back burner and given Lockheed Martin and the Marines two years to show they can fix it affordably.

Graham Warwick, an engineer by education and aviation gearhead, sums up the problems which can be boiled down to hot parts and fragile parts due to the unique stresses posed by the short-takeoff-vertical-landing aircraft.